8. STOCK-BASED COMPENSATION

In July 2016, we commenced administration of the ANI Pharmaceuticals, Inc. 2016 Employee Stock Purchase Plan, which was approved by shareholders in our May 25, 2016 annual shareholder meeting. The Board of Directors and shareholders approved a maximum of 0.2 million shares of common stock, which were reserved and made available for issuance under the ESPP. Under the ESPP, participants can purchase shares of our stock at a 15% discount. We issued one thousand shares in 2016. In the year ended December 31, 2016, we recognized $2 thousand and $23 thousand of stock-based compensation expense related to the ESPP in cost of sales and sales, general, and administrative expense in our consolidated statements of earnings, respectively.

All equity-based service awards are granted under the ANI Pharmaceuticals, Inc. Amended and Restated 2008 Stock Incentive Plan (the “2008 Plan”). As of December 31, 2016, 0.2 million shares of our common stock remained available for issuance under the 2008 Plan.

We measure the cost of equity-based service awards based on the grant-date fair value of the award. The cost is recognized over the period during which an employee is required to provide service in exchange for the award or the requisite service period. We recognize stock-based compensation expense ratably over the vesting periods of the awards, adjusted for estimated forfeitures.

The following table summarizes stock-based compensation expense incurred under the 2008 Plan and included in our consolidated statements of earnings:

(in thousands)	Years Ended December 31,
	2016		2015		2014
Cost of sales	$	60	$	82	$	104
Research and development	$	112	$	109	$	69
Selling, general, and administrative	$	5,870	$	3,665	$	3,250

We recognized income tax benefits of $1.0 million, $0.4 million, and $0.6 million for stock-based compensation-related tax deductions in our 2016, 2015, and 2014 consolidated statements of earnings, respectively.

Separation Agreement

On April 26, 2016, we entered into a Separation Agreement and Release (the “Separation Agreement”) with our former Chief Financial Officer (the “Former Officer”), who resigned effective May 6, 2016. Under the Separation Agreement, 25,167 stock options previously granted to the Former Officer vested on May 6, 2016. In addition, 4,050 restricted stock awards and 2,000 stock options previously granted to the Former Officer will vest on March 15, 2017, subject to certain conditions. These actions were accounted for as a modification of the underlying awards and the full expense for the modified awards was recorded in the second quarter 2016. In the second quarter of 2016, we recorded $0.9 million of stock-based compensation expense, net of forfeitures, in relation to the Separation Agreement. In the second quarter 2016, we recognized $0.4 million of additional expense related to the Separation Agreement and transition that was not related to stock-based compensation. All expenses related to the Separation Agreement and transition were recognized in the second quarter 2016.

Stock Options

Outstanding stock options granted to employees generally vest over a period of four years and have 10-year contractual terms. Outstanding stock options granted to non-employee directors generally vest over a period of one to three years and have 10-year contractual terms. Upon exercise of an option, we issue new shares of our common stock or issue shares from treasury stock.

For 2016, 2015, and 2014, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, using the following weighted average assumptions:

	Years Ended December 31,
	2016	2015	2014
Expected option life (years)	5.50 - 6.25	5.50 - 6.25	5.39 - 6.25
Risk-free interest rate	1.14% - 1.55%	1.31% - 1.82%	1.55% - 2.03%
Expected stock price volatility	49.4% - 51.7%	47.9% - 50.5%	50.6% - 55.1%
Dividend yield	—	—	—

We use the simplified method to estimate the life of options. In 2014, 0.3 million options granted by the board of directors but requiring shareholder approval were approved at the May 22, 2014 shareholder’s meeting. As a result, the fair values of these options were calculated using the simplified method less the time between the grant date and the date of the approval, or 5.39 years. The risk-free interest rate used is the yield on a U.S. Treasury note as of the grant date with a maturity equal to the estimated life of the option. We calculated an estimated volatility rate based on the closing prices of several competitors that manufacture similar products. We have not issued a cash dividend in the past nor do we have any current plans to do so in the future; therefore, an expected dividend yield of zero was used.

On April 7, 2016, the Board of Directors approved grants of options to purchase 63 thousand shares of common stock to our officers and options to purchase 13 thousand shares of common stock to non-employee directors.

On April 16, 2015, the Board of Directors approved grants of options to purchase 47 thousand shares of common stock to our officers and options to purchase 9 thousand shares of common stock to non-employee directors. On October 12, 2015, the Board of Directors approved a grant of options to purchase 3 thousand shares of common stock to a new non-employee director.

On April 1, 2014, the Board of Directors approved grants of options to purchase 59 thousand shares of common stock to our officers and options to purchase 16 thousand shares of common stock to non-employee directors. On August 20, 2014, the Board of Directors approved a grant of options to purchase 25 thousand shares of common stock to one of our officers.

A summary of stock option activity under the Plan during the years ended December 31, 2016, 2015, and 2014 is presented below:

							Weighted
					Weighted		Average
			Weighted		Average		Remaining
(in thousands, except per share and	Option		Average		Grant-date		Term		Aggregate
remaining term data)	Shares		Exercise Price		Fair Value		(years)		Intrinsic Value
Outstanding December 31, 2013		120	$	50.35				2.4	$	81
Granted		120		31.59	$	16.84
Options previously granted, approved by shareholders		325		6.39
Exercised		(43)		19.45						638
Forfeited		(4)		6.36
Expired		(60)		73.96
Outstanding December 31, 2014		458	$	14.44				8.7	$	19,472
Granted		138		62.07	$	30.08
Exercised		(89)		9.24						3,937
Forfeited		(33)		11.81
Expired		-		-
Outstanding December 31, 2015		474	$	29.40				8.2	$	10,136
Granted		265		45.60	$	22.45
Exercised		(127)		11.79						5,837
Forfeited		(32)		47.84
Expired		(2)		139.32
Outstanding December 31, 2016		578	$	39.28				8.2	$	12,928
Exercisable at December 31, 2016		128	$	30.87				7.1	$	4,033
Vested or expected to vest at December 31, 2016		567	$	39.11				8.2	$	12,776

As of December 31, 2016, there was $7.6 million of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.7 years. During the year ended December 31, 2016, we received $1.6 million in cash from the exercise of stock options and recorded a $0.7 million tax benefit related to these exercises. During the year ended December 31, 2015, we received $0.8 million in cash from the exercise of stock options and recorded a $0.3 million tax benefit related to these exercises. During the year ended December 31, 2014, we received $0.8 million in cash from the exercise of stock options and recorded a $0.1 million tax benefit related to these exercises.

Restricted Stock Awards

Restricted stock awards (“RSAs”) granted to employees generally vest over a period of four years. RSAs granted to non-officer directors generally vest over a period of one to three years.

On April 7, 2016, the Board of Directors approved grants of 31 thousand RSAs to employees and 6 thousand to non-officer directors.

On April 16, 2015, the Board of Directors approved grants of 24 thousand RSAs to employees and four thousand to non-officer directors.

On April 1, 2014, the Board of Directors approved grants of 30 thousand RSAs to our officers. The restricted stock was granted subject to shareholder approval of an increase in the total restricted stock available for grant under the 2008 Plan. The increase in total restricted stock available for grant under the 2008 Plan was approved by shareholders at the May 22, 2014 annual meeting and the restricted stock was granted as of May 22, 2014.

Shares of our common stock delivered to employees and directors will be unrestricted upon vesting. During the vesting period, the recipient of the restricted stock has full voting rights as a stockholder and would receive dividends, if declared, even though the restricted stock remains subject to transfer restrictions and will generally be forfeited upon termination of the officer prior to vesting. The fair value of each RSA is based on the market value of our stock on the date of grant.

A summary of RSA activity under the Plan during the years ended December 31, 2016, 2015, and 2014 is presented below:

			Weighted
			Average Grant		Weighted Average
(in thousands, except per share and			Date Fair		Remaining Term
remaining term data)	Shares		Value		(years)
Unvested at December 31, 2013		50	$	10.20		2.8
Granted		30		29.61
Vested		(17)		10.20
Forfeited		-		-
Unvested at December 31, 2014		63	$	19.34		2.6
Granted		28		67.26
Vested		(23)		15.82
Forfeited		(5)		19.41
Unvested at December 31, 2015		63	$	42.72		2.2
Granted		38		40.59
Vested		(30)		33.89
Forfeited		(8)		46.05
Unvested at December 31, 2016		63	$	45.72		2.2

As of December 31, 2016, there was $2.0 million of total unrecognized compensation cost related to non-vested RSAs granted under the Plan, which is expected to be recognized over a weighted-average period of 2.2 years.